New Metal On The Block

Precious metals like gold and silver hold financial and emotional value for most Indians. However, buying, holding and selling them has become increasingly difficult. So, when paper gold in the form of Gold ETFs was launched, it was an effective way of transacting in the yellow metal without the trouble that comes with physical gold. Following in the same footsteps, we now have the soon-to-be launched Silver ETFs. Moreover, bullion is considered a hedge against inflation and acts as insurance during adverse economic situations.

The Form Factor  

Thanks to innovations in the financial sector, you can invest in various forms of gold and silver. One of the ways to invest in gold is through Gold ETFs, but Silver ETFs are not yet available in India. That may change soon. In September 2021, the capital markets regulator, Securities and Exchange Board of India (Sebi), allowed the launch of Silver ETFs by fund houses.

Till now, in India, there are mainly two ways in which one can invest in silver—one is physical and the second is through the futures market. Investing in physical silver has limitations such as holding risk and purity issues. The other major concern is the difference in price at different geographical locations and also the gap between the buy and sell price. The futures market is for very savvy investors. But now with the help of Silver ETFs, even small investors will be able to participate and have access to a good price mechanism with  no purity issues and physical holding risks and higher liquidity as one can easily buy and sell as and when required.

“Silver, being more affordable, is an ideal choice for those who want to invest in bullion. Often, silver is considered the poor cousin of gold,” says Vishal Jain, head, ETF, Nippon Life India Asset Management Ltd.

Experts believe that Silver ETFs will give investors more variety as well as options to participate in commodities. “The launch of Silver ETFs will widen the range of commodity-based ETFs offered by mutual funds,” says Alok Aggarwala, executive vice president and chief research officer at Bajaj Capital.  

Outlook Money spoke with fund houses and found that they are waiting for clarification on some fine print and other clauses from the regulator before launching Silver ETFs. “At present, we are awaiting the final regulations, after which we will evaluate the same for further action,” says Jain. While that happens, let’s take a closer look at the precious metal as well as the features of Silver ETFs known until now.  

Gold Vs Silver

Although both gold and silver are precious metals, the two are very different in many financial aspects.

“Gold is used as a store of wealth and for ornamentation like jewellery. Silver is basically an industrial commodity,” says Jain. It is used in various industries, especially in manufacturing and industrial fabrication, since it does not corrode and has thermal conductive properties. It is extensively used in products such as electrical switches, relays, batteries and computer motherboards. “Industrial uses make silver more volatile than gold and (a metal that) offers a higher return than gold during periods of economic growth,” says Vibhu Ratandhara, senior analyst at brokerage firm Bonanza Portfolio. Gold is driven more by safe-haven demand, while silver is driven more by industrial demand, adds Aggarwala.  

Silver is a high-beta version of gold. Experts say silver beta is in the range of 1.2-1.4 relative to gold. This means if gold price rises by 1 per cent, silver price rises by 1.2-1.4 per cent in the same period.

How Has Sliver Fared?

The value of industrial metals had been contracting for almost 13 years. Silver underperformed gold during the better part of this cycle. In the last 10 years, silver has fallen almost 24 per cent as opposed to an 8 per cent gain in gold price, as of September 30, 2021. Such long periods of underperformance could be a cause of concern for investors.  

However, after a long period of underperformance, silver is back in bloom. The price of silver futures at MCX more than doubled between March 2020, when the Covid pandemic started and silver was below Rs 34,000 per kg, and August 2020, when it peaked at above Rs 77,000 per kg, as against gold futures that rallied from Rs 38,500 per 10 gm to Rs 56,000 per 10 gm during the same period. This translates into an absolute return of 45 per cent in gold against 100 per cent in silver. In the last six months, silver prices have fallen by over 10 per cent, whereas gold prices have gone up by over 2 per cent, as on October 15, 2021.

Bright Future Ahead

Experts believe that sentiment should change as the demand for industrial metals strengthens. “As the global economy recovers from the Covid shock, commodities, particularly industrial metals and energy, seem to have started a fresh multi-year bull run, after more than a decade of bear market,” says Aggarwala. Silver prices will be driven mainly by rising industrial demand and partly as a hedge against inflation. “We believe silver will outperform gold going ahead, more in tandem with industrial metals,” adds Aggarwala.  

Industrial uses of silver are growing rapidly as it has the highest electrical conductivity. “Industrial demand for silver has grown at a much faster rate and this will drive prices higher at every correction from here on,” says Ratandhara. Silver has many roles to play in future technologies such as 5G in telecom, electric vehicles and green energy. This opens a new window for consumption and demand for the metal. Investors could look at silver as a good investment opportunity for a longer period, adds Ratandhara.  

Word Of Caution

Adverse situations such as an economic downturn could impact prices of silver more sharply than gold. Also, the global supply of silver is much higher than of gold. The total supply of new silver each year is around 1 billion ounces compared with gold supply of around 120 million ounces. Therefore, although silver is recognized as a precious metal, more than half of the demand comes from industries, which makes it seem more volatile than gold.  

What Should You Do?  

Silver could be a good portfolio diversification tool and act as a  hedge against inflation, while giving better returns than gold during economic revival over a longer period.

Experts believe that investors should take some exposure in silver, especially for the purpose of diversification. “Investors add precious metals like gold and silver to their portfolio because prices of these assets tend to be not correlated with those of other securities such as stocks and bonds, thus reducing the overall portfolio risk,” says Jain.

If you want to buy into Silver ETFs, do so for the long term. “Avoid a speculative position; look at Silver ETFs for long-term portfolio diversification according to your risk profile. One could invest in SIPs (systematic investment plans) of Silver ETFs once they are launched. Accumulate at every price difference for handsome returns over a longer period,” says Ratandhara.

What About Taxation?

Experts say that just like Gold ETFs, Silver ETFs would be taxable as debt investments. This means that capital gains from Silver ETFs shall be treated as long term only if held for more than three years. Long-term capital gains tax rate would be 10 per cent without indexation and 20 per cent with indexation. Short-term capital gains from Silver ETFs will be added to the taxpayer’s total income and taxed at the marginal rate of taxation applicable.

Silver ETFs are new on the block and most of the details are still being ironed out. One of them is the cost of holding the metal. For the amount of Silver ETFs bought, fund houses will have to hold an equivalent amount of physical silver. Silver is traded in larger quantities (in kilograms versus grams for gold), so more of it will have to be put in reserve, which will come with its own costs. “Silver requires around 80 times more storage space than gold and is, therefore, more expensive to store,” says Jain.

Investors should wait and watch. More information is needed regarding Silver ETFs: unit size, liquidity, taxation and, the most important, cost. If you don’t want to bear any initial risk, you can participate once liquidity picks up and the unit size fits your wallet and portfolio.

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